AJOC EDITORIAL: No news is bad news for AK LNG Project

One might think that a gathering of the five most influential figures in the massive Alaska LNG Project would have had more news to share, but in the end it was a press conference about nothing.

And that’s bad news for everyone involved.

Standing shoulder-to-shoulder with the state’s project partners whose taxes he’s proposing to raise dramatically at a time when their costs are nearly double the price per barrel, Gov. Bill Walker had no answers for where AK LNG is headed.

As the Journal first reported Feb. 10, the project is now officially off schedule and most likely delayed from undertaking the more advanced work for at least two years.

The state and its producer partners will finish the preliminary-front-end engineering and design, or pre-FEED, this year as planned but there will be no vote on a constitutional amendment in November because there will be no fiscal contracts to present to the Legislature for approval.

The next time the state’s residents could vote on an amendment to set tax policy for the project will be 2018.

Ostensibly, the delay in the project is related to the failure among the three North Slope producers who own differing shares of the gas at Prudhoe Bay and Point Thomson to reach the lynchpin gas balancing agreement governing offtake from the two fields once the project goes into production.

But the “elephant in the room,” as Walker put it, is the price per barrel that has hovered in the mid-$20s or low $30s since the start of the year.

As anyone who’s been following along knows, the oil companies on the Slope and around the world are hemorrhaging cash in the current price environment. Contemplating a spend of $2 billion or more among the state and its three partners for the full front end engineering design, or FEED, stage is simply not a viable option.

ConocoPhillips, for example, burned through $2.7 billion of its $5 billion in cash during 2015 and was compelled to slash its dividend by two-thirds from 74 cents per share to 25 cents per share.

From this vantage, then, the best way to slow-walk the project without obviously slow-walking the project is to hold off on sealing the deals that would force the companies to make the FEED decision sooner than is fiscally responsible to their shareholders.

That is certainly disappointing to Alaskans who have seen the concept of commercializing North Slope gas advance further than it ever has, but with the state in deficit spending with a budget hole approaching $4 billion it doesn’t exactly have a lot of cash to throw around either.

Between the Alaska Gasline Inducement Act subsidies to TransCanada, the subsequent buyout of that company’s interest in AK LNG this past November, and the state’s obligations for its share of pre-FEED spending, Alaska is blowing past a half-billion dollars spent on its last two efforts to monetize North Slope gas.

The state does have more to show for its money in the current effort, with export permits in hand and a refined cost estimate to result from pre-FEED, but anything would look good compared to what Alaska got out of AGIA.

With a desperate need to hold this project together through a brutal price cycle nobody saw coming, Walker must rethink his proposals to hike taxes on our project partners.

Walker wants to raise the tax floor from 4 percent to 5 percent, and restructure the system so that producers are always paying taxes even when they are losing money. Walker cannot have it both ways. He cannot endlessly repeat that Alaska should act like an owner state while expecting to be insulated from depressed markets.

It has always been well known that such a capital-intensive project with much thinner margins would require a healthy oil business to support it, yet Walker is proposing to drain the Slope producers’ cash at a time when they have none to spare.

With or without AK LNG, the state and the Slope producers are in this boat together. We shouldn’t be the ones trying to sink it by weighing our partners down with more taxes.